If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?

Question

Quizplus · Accepted Answer

A reduction in the budget deficit would likely increase saving and investment the most under the condition of a very inelastic (steep) supply of loanable funds. This is because a reduction in the budget deficit means less government borrowing which in turn reduces the demand for loanable funds. With a very inelastic supply of loanable funds, a reduction in demand would lead to a greater decrease in interest rates, which would then encourage more saving and investment.

If the Supply of Loanable Funds Is Very Inelastic (Steep)